The executive Real estate investing Show


Exploring Real Estate Equity Arrangements and Waterfalls with Jonathan Livi



This week on The Executive Real Estate Investing Show, host Michael Holman talks with Jonathan Livi.

Jonathan is a four-year real estate veteran, having started right after college. With a degree in economics, and working as a mortgage broker, it didn’t take long for to learn the ins and outs of the capital stack and how it should be structured. He lives for all the economic “minutia that other people find boring,” so a jump into the equity brokerage business seemed like a logical step. Now at Buckingham Advisors, Jonathan specializes in finding “interesting sources of capital” for developers. A devout Jew whose family hailed from Iran, Livi teaches Torah Bible classes and even has a podcast called “The Parasha Podcast.”

Listen now as Jonathan simplifies the often-complicated ways to secure equity for Real Estate Investing.


Get Outside the Box and Be Creative

When it comes to raising capital for your real estate ventures. There are literally hundreds of ways to combine sources to find capital. There are an infinite number of possibilities. It is not black and white by any means. No matter what you’re an expert in or trying to grow your business in, there is always room for creativity.  It might be really easy to be creative, and it might be really difficult to be creative. There are always options to be creative. Don’t get stuck in a box. You are only going to find those creative solutions if you make the determination before the situation has. Then you’re going to be creative. Then you’re going to start reaching out. Then you start making those networks. Those decisions that can take you from being just in the box, which potentially kills deals and opportunities to getting outside the box. So don’t go be afraid, get outside the box and be creative!


The Executive Real Estate Investing Show Podcast

EP 24: Exploring Real Estate Equity Arrangements and Waterfalls with Jonathan Livi

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Note: Audio transcription has been automatically transcribed

Welcome to The Executive Real Estate Investing Show. This podcast is for you, the busy business owner or executive looking to create generational wealth. Here, we’re going to show you how to do that through real estate investing from multifamily to industrial and everything in between. You will become a real estate investing expert. And now, here’s your host, Michael Holman.

Hello everyone. And welcome to another episode of The Executive Real Estate Investing Show. I’m your host, Michael Holman. We have an awesome show today. Jonathan Livi. He is an equity broker and he knows he’s in the real estate. Like crazy and he is wicked smart. He knows everything that’s going on.

I mean, if there’s somebody out there, he probably knows who it is and he’s dealing in probably the most difficult part of the entire capital stack. He equity. So definitely want to tune in to today’s episode. Before we get into today’s executive tip, go check out the website, We got episodes. We got videos. We got resources where you can ask a question, leave a rating and review all of that stuff. Go out, check it out. Love to hear from you there. Also, if you’re liking what you’re hearing, go, please leave us a rating and review Apple Podcast, Spotify, Stitcher, wherever you’re listening to this podcast.

We love to get the word out. The more we can get the word out, the more people we can help, the more business owners, the more businesses. The more aspiring business owners, we can help reach and teach about this wonderful, wonderful investing tool called real estate investing so that they can go from a knowledge to an expert, not as our goal.

So leave us a rating and review. Getting into today’s executive tip today’s tip. And I might’ve said this before, but I’m going to say it again, be creative, right? Don’t get stuck in a box. And that’s what you’re going to find too. Especially as we go throughout this episode today, I mean, in the equity space, you can pretty much do anything.

I mean, there’s an infinite number of possibilities of combinations of subsets. I mean, it’s not black and white by any means. And that’s how. That’s how most industries are. I mean, no matter what, you’re an expert in, no matter what your trying to, to grow your business in there’s room for creativity, a hundred percent guaranteed, no questions asked.

It might be really easy to be creative, and it might be really difficult to be creative, but there’s options to be creative. We deal with this all the time. I mean, as real estate developers, even we are. I have to be really creative in how we get all the money. I mean, that’s just one example. I mean, there’s, there’s an infinite number of possibilities.

Don’t get stuck in the box. Right. And you’re only going to find those creative solutions. If you make the determination before the situation has. Then you’re going to be creative. Then you’re going to start reaching out. Then you start making those networks and those decisions they can take you from being just in the box, you know, which potentially kills some deals, kill some opportunities to getting outside the box.

Right. So don’t go be afraid, get outside the box and be creative. Now let’s get into this episode with Jonathan Livi. He is out of New York and he’s doing all sorts of real estate. Everything. He’s been a mortgage broker. He’s into equity. He’s building a business, a lot of great information. I’ve actually been working with Jonathan on a number of deals that we do personally.

And that has been a great experience. And this is what led to his invitation on this pod. Just a quick introduction to him. So he’s an equity broker. He likes to claim that he’s asset class agnostic, meaning he is good with just about everything that you could throw at him. Really flexible and then a couple of just personal things that we were actually just talking about.

Jonathan, you teach Bible classes or, or Torah classes, as a major passion and you have a podcast called the power shop podcast. So fun stuff, Jonathan, welcome to this.

Thank you so much, Michael. Appreciate it then.

But  I absolutely will Jonathan tell, tell the listeners a little bit about you.

Sure. been a real estate now for four, five years or something, how to get it right, right after I did some extra schooling for, you know, for my, for Jewish studies. So right after college, I stayed for an extra year and did some Jewish studies. I went to Yeshiva university, which is like a combined, Jewish, you know, Educational school with, with, you know, secular college.

Can we combine those studies it’s full days. But I did that for three years of undergrad and then I stayed an extra year to do some extra Jewish studies, after which I jumped into real estate. As everybody with Johnson’s real estate got beaten up a little bit and for a couple of. Well, you know, I learned quick, I haven’t, I have a degree in economics and I’ve always been fascinated by finance.

So it didn’t take long to just understand how the capital stack works and how it’s supposed to be structured. Getting into the mortgage brokerage business. It was great. It was traveling a lot with meeting a lot of people, but my frustration with it was that as a. So, you know, you’re, you’re dealing with something that pretty much anybody else could, could put together.

It’s more of like, you’ll stand out by how much you hustle kind of business, because they’re all dealing with the same commodity. So I started to feel like I had expertise in finance and I could understand the way capital stack restructure and understand joint ventures on the sub waterfall, all the fun stuff that a lot of people find it a little bit arcane and.

And I was like, you know, what, if I have that skillset might as well put it to you. So I jumped into the equity brokerage business, got all my securities licenses and things like that that are required. People don’t know about that by the way, you need a securities license in order to do this. But and then also just, you know, making introductions on the equity side.

So it’s a fond, a combination of networks, the constant. Now we’re coming with developers and building relationships with developers for doing cool projects and who need large amounts of capital. And then it’s constant networking on the capital side to see if you could, you know, find interesting source of capital for those same developers.

So it’s a constant growth of the business on both. What I tell developers is like, you build a relationship with us and we know what you’re doing. It’s beneficial to you because, you know, I’ll give you an example. We have a developer that I’d be speaking to start a very large developer and they know they’re buying core plus assets and typical stuff right now is quite overpriced.

So they’re, they’re hitting IRR blank, 11% on this core plus, you know, stuff with like a six to 7% cash on cash. They’re buying it on like a three and a half cap typically. They’re looking for cheap capitals, right. And the stuff that, you know, the typical groups will reach out to the institutional groups in the U S that are looking for that 11 to 13% IRR on the, that,  those groups, their capital’s a bit too expensive because the market just doesn’t allow for that, you know, kind of buying IRRs anymore.

So for a group like that, I mean, I’ve been doing some research into overseas cap, you know? So it’s, it’s constantly, if, you know, find a client, see what they need. And then go back and start networking more on the capital side. And I, as those relationships grow and the, you know, the potential only grows more, you know, you’re going to get exactly what where capital wants to go at the same time you learn exactly what’s clients are looking for.

You’ve got a very good bird’s eye view of the entire market. Again, as I said, as you said, we’re asset class Gnostics. So we’re doing deals in industrial. We’re doing a multifamily, we’re doing self-storage, retail even. We’ve done a couple of co-GP pieces on retail deals. We’re doing med, we’re doing a medical office co-GP right now.

We’re all over the place. We underwrite everything. And you know, it’s just a lot of relationships to maintain a lot of phone calls and. Meeting people in person when possible. Yeah.

That’s, that’s awesome. I mean, and, and I love how you kind of mentioned, cause I I’ve seen the same thing. Right. you’re talking about how, oftentimes, especially in today’s market, you know, it’s a.

Being a mortgage broker oftentimes feels like a commodity. Right. And, and to some extent, I, I honestly, I completely agree a lot of times it’s related not to what the loan is at the end of the day, because a lot of times people see the same lenders, you know, people are going to the same lenders. It’s who’s the person that.

Playing point on that. Right. It’s you know, kind of like what you said, it’s how much hustle they have. And so you made this switch, I’m assuming you made the switch to equity because it felt like a lot higher barrier to entry. Would that, would that be correct? Another element that’s my, my original interest in real estate is because I want to see.

I want it to, you know, I have dreams of, I guys are going to see, I have a lot of passions outside of work. So, you know, there was a dream of being able to develop some streams of income other than my day-to-day job and develop some freedom, you know, at the end of the day, I think our biggest commodity as humans is time, you know, and real estate, if you do it right, can be a great way of buying yourself some time.

So on the underwriting, on the deck, It’s more, you know, it’s very downside on the writing, you know, lenders only underwrite to the downside, so they don’t really care about your IRR. It just care about what the downside is on the deal. You know, if you’re supporting them with 30% IRR, as you talk, you put them in for 90% levers.

They’re not going to do the deal because that’s a lot of leverage. So there’s plenty of upside and not be able because they’re not getting it. The lender never gets upside. So they’re only underwriting for the downtown. So to really learn how to underwrite, it was going to take more than just being a mortgage broker, and, and being on the equity side.

I mean, I don’t want to encourage people to get into the space. I’m not looking for new competitors, but at the end of the day, it’s, it’s a different style of underwriting. You’re more analyzing to see if, you know, the first thing is you have to like. So to know if you like to do it yourself, you have to learn how to actually understand the fundamentals.

And that’s what I gained most, especially at my time at Buckingham without the time and Goldstein was the principal here. There was a lot of learning how to underwrite and, you know, to quickly understand, to see what’s going on, what all these numbers mean, you know, not just an LPV, but you know, is that a true IRR?

What kind of assumptions are going into creating that? You know, how to, you know, and they’re generating these IRR. What, what are the growth assumptions? What are the, what, what are they paying for unit what’s their basis in the property? So that’s how I ended up developing, developing the confidence also to co GP investments and syndicating capital from people that we know from friends and family.

Just to give you a little bit of insight into that when we broke her an equity deal at just a plain institutional equity group with an institutional grade sponsor, but we’re typically doing co-GP fees at smaller. We’re buying a much smaller deals that are the kinds of deals that are, that are both the radar of the institutions.

And for those, we rely on our own underwriting skills actually make sure, you know, we’re buying. Right. So to get to that level, it took, you know, I wouldn’t have been able to get that point. If I was sitting just mortgage brokers, the underwriting is completely different. So that was the motivation. I want them to, you know, become a better underwriter and gain more competence on the investment side.

And of course, you know, if you have the knowledge to structure a waterfall you get paid for knowledge in this business. So. You know, like the fees are larger, you got, you have much more negotiating power to maintain your. And as you get better and older and you have more deals under your belt, you can, you can be more and more demanding on your pay.

Oh yeah. No, that’s, that’s awesome. And the thing that I love about you is, is you are a great networker. I mean, I know that we’ve seen each other through LinkedIn. I think that might’ve been how we actually hooked up. It feels like I’m saying that every single week, to be honest, with every single one of the guests, but I, you know, I remember I’ve seen everything where you, you even outlined.

General waterfall structures and Hey, here’s what a JV structure looks like. Just awesome knowledge that you’re just sharing with everybody. And I assume that that’s part of this networking that you’re talking about. I mean, what are your, what are your favorite ways to connect with people? I mean, cause you have to go out and you have to find these developers who are, who are trying to get the capital.

How are you networking with them?

The first thing is LinkedIn is huge. I mean, it used to be that your company used to provide you a list of. And like they would have to generate that lift that probably cost them some money to generate the list. It’s on Excel. You have an email and you have a phone number and you just call, first of all in the equity business is not it’s, you know, you kind of, you’re not, you’re not fishing for people.

Who’ve been overlooked in the equity business. You’re trying to build relationships with like the top developer. You know what I mean? Because you’re, you’re, you’re going to the sword that you die on is going to be the quality of the sponsors, right? Yep. If, you know, if you know sponsors that just aren’t up to par and there, and there are plenty of them that are coming to look for equity, because who else would look for equity other than the people that don’t have their act together.

If those are the only guys they’re working with, then you’re going to develop a really bad name. And none of the institutional investors are going to want to talk to you. So that whole system of just taking a list and cold calling. I would not say the perfect fit for like the equity brokerage business.

What LinkedIn does is, you know, they’re great search tools for contact. So if you have a big enough contact with, I mean, I don’t know how this happens. My, I don’t friend request people so often on. But I have thousands of people that are in my network. So that’s larger than any lists that could have been provided to me by the heads of my company.

And you can direct message them all. The strategy would link. I was, I was already serious about trying to be very, very, very light on the fluff. I’m not a fluffy guy. I don’t waste time and I like to shoot people straight. So the goal is to always provide value. I mean, from the secondary speak, their client, the goal should be to be a source of value for them.

First deal, frankly, barely ever worked out with a client. So you got to try a couple of times, but in that first year, You could prove that you actually provide value that, you know, you’ll make introductions. That could be productive down the line. So same things with LinkedIn. I got my start with a very good buddy of mine, Aaron Ducker, who is in the retail world.

He buys, he buys retail deals that are, that have a quick value add component. He was an expert in leasing retail. So he comes at it from leasing brokers perspective and he just showed me the rope on LinkedIn. And I quickly just made it my goal to just provide as much knowledge as possible for the public about what we, what we do and you know, how a calculus stack should be structured.

And I guess people like it. I know. A lot of people reach out to me for help, and we’re sending their capital stack and you just try to be nice. Provide as much value as you can all the time. And you know, LinkedIn has been on a great source of, of just networking. And then once that happens and you get your foot in the door, I don’t want you to speaking to 30, 40 developers who know you and trust you and show you their deals and ask you to work with them.

It’s a lot of word of mouth referrals and things like that. You’ll have. If you get good enough. I mean, if you got lucky enough, blessed enough, I guess the God you’ll have, you know, once or twice a week, one of your clients will like, Hey, I know this guy, would you be interested in meeting him? And the networking, you know, train just continues.

That’s awesome. Well, Jonathan, that might be the title of our show. Do you know special guest Jonathan Livi? Not a fluffy guy. That’s what I think I’m going to make it. I do it in my Bible fastest too. I’m just, I’m a really simple, I’m like really focused on just trying to see what the text is trying to tell you.

I’m not, I just don’t have patience for like, you know, the fluff and the fanfare and like the, the, the lovey-dovey. I go on here. I post, you know, I’ll do, I’ll do some of that. I, I think anybody who’s big on LinkedIn does some of that, not a real estate related point of interest. If we choose fun, funny, and you want people to hear, but predominantly every post.

Either I did a campaign about sharing information without identities revealed reports, but on interesting capital sources that people can know about. So there are some like interesting capital forces that fit between joint venture equity and preferred equity that are just like a, it’s like a funny structure, joint venture equity partners that are looking for specific things.

I would post about their criteria and what they’re looking for. And it’s got loads of people just reaching out and saying, Hey, this sounds like an interesting group. If we could talk, like, learn more about them. And that would be like, your window is to speaking to them more generally about anything. And I do a lot of.

I think I did, I think one of my best series, it was one on understanding of joint venture equity term sheet. So I just took a term sheet that one of my clients provided the sponsor of mine. And I just blanked out everything that had to relate to their identity or anything that would have unveiled too.

It was kind of just, you know, people what each segment of the term sheet meant. So I think, Cutting out, cutting out the garbage and focusing on providing value and useful information for people. It does.

No, that’s, that’s awesome. And that’s a perfect transition cause I definitely, I saw that that term sheet, it was like, you know, three or four posts.

I definitely even learned some things, even though I’ve done joint venture, equity deals. So. Now getting into some of the equity and the specifics of equity, right? I mean, just off the top of my head, I could think of joint venture equity, limited partner equity, co GP equity. I mean also, I mean, you can even get into preferred equity, which, you know, looks more like debt than anything else.

Run us through at least those first three, and maybe that fourth, one preferred equity run us through what, what are all these different types of equity? What do they do? How are they different? So that everyone can understand it. I think there’s a lot of confusion. I think a lot of people get into this space.

There’s just, equity is equity is equity, right? They put in money and. Do deals and that’s that, you know, that’s that, explain the differences? Yeah.

Equity is definitely not equity, different equity cost, different amounts. You know, there’s cheaper equity, there’s more expensive equity. And then there’s also terms and conditions which come with all the equity.

So there’s more strict equity, more demanding equity and less than men. So I’ll start with, you know, we’ll start from the top of the food chain, which is the most expensive let’s say, which would be co-GP equity. You use co-GP equity for one or two reasons, either. You know, any developers, you know, whenever you have a joint venture partner who wants to come and sign onto the deal, they’ll typically demand that the sponsor has skin in the game.

So you’re talking a 90 10. Of the equity portion of the deals to say you have a deal at $40 million, 10 million of which is equity 90 times two, it would be 90 million, 9 million would be brought by the joint venture partner and a million would be brought by the sponsor. Now say the sponsors working on five deals at the same time.

I know for one deal putting a million dollars together from, you know, you’re, you’re closest with internal company. Money is pretty doable for developers of that scale, but if you’re doing five deals, you know, $5 million that needs to be contributed, tree steel, it becomes very difficult. So the first reason you’d use co-GP if the equity is fulfilled, that that portion of the stack that’s small 10%.

Of the contribution that the sponsor has to give as their skin in the game. There are companies that specialize in investing into that. And so portion, you’ll took Delta for, can charge more for it. You know, I’ll see things between 20 and 30% of the, of the, of the fees that are being charged by the sponsor will be paid for someone who contributes back on a capital on a pro rata basis.

Of course. So that’s one reason you’d use a co-GP equity partner. Another reason you use co-GP. Is whenever you just don’t, there’s a part of the, of the process, typically capital raising. They just don’t want to handle. So you’ll find a co-GP partner we’ll invest. Not only will invest alongside you on the.

10% share that you need to give, but they’ll also raise that 90% share that you need on the backend. So I put a co-GP through with do, and they’ll also oftentimes use groups come in all different colors, but sometimes they’ll find on debt for you. They’ll provide credit enhancement. If you want to get a big loan on they’ll close their balance sheet, of course, you know, to get to get you the kind of debt.

Again this is very expensive capital they’ll raise LP equity with for you, but then they’ll also charge you an arm and a leg. Get it off your fees at the sponsor on along the way, groups like that, because they’re the most expensive. They’ll also do the most be the most creative and you know, the way they’ll come into the deal.

If you let’s say you want money for pre-development, which is a big headache that all developers have and almost every deal, you know, there’s a lot of money that needs to be spent before construction on. Often closing on the land happens before that and there’s money that’s spent throughout the whole entitlement process.

So, and then that’s a very risky, that’s also very risky money because if you, you know, if your deal gets to the, you know, to the 10 yard line and then something goes wrong and then vital into phoning or something like that, then all that money you spent may end up being just wasted money on a deal.

That’s not going to get off the ground. If you want money for predef, they’re typically only looking at co GP investment. Other sponsors potentially go do a joint venture with you, but it’ll take a nice portion of your fees. They may, you know, they’ll come along for the ride at that stage. So that’s what we’ll call like the top of the equity.

One question I got on that, Jonathan. Yeah. Most of the people that you see as code GP, Equity, investors, are these mostly like individuals that you’re seeing? Are they mostly institutions? Is it a, is it a mix? What, what is the makeup of your general code? GP equity

investor all over the place. I have one family office.

That’s they’re like a muscular family office where they have water relationship and they could pretty much. But they just want to be capital, cause they don’t want to, you know, do like actual property management. So because they know so much, but they still just want to be in a capital position.

They’ll comment with code GPS, you know, on, on any deal. Other groups, then there are individuals that do it. I know a few individuals that just have a couple, I know one in Frisco and then one I think is in, is in Washington DC, but they just have very large balance. And they know that they can provide the kind of credit enhancement a lot of sponsors need.

So they’ll comment or the code JP for the credit enhancement portion. And those are just individuals are not those aren’t those aren’t people that you know are institutional anyway. and then you have very, there’s one group out of New York. I’m not going to mention their name, but they built the whole business out of, out of institutional code, GP investing, where they, you know, they buy into a programmatic venture with, Joint venture partner.

And along the whole way, they’re staying as code GCs the whole, this whole time. So you’ll see it. It’s, there’s a, there’s a unique landscape of these groups. And then often to be honest, sometimes it takes the level of creativity. You know, I have a sponsor here with a phenomenal deal, and I know he needs a co-GP partner.

And I don’t really know if there are any institutions I want to do this deal, but I know that its competitor down the block. If I structure the co GP venture for them to work on, they may be able to work on this. I just share their, you know, the, you know, share the fees and things like that. I didn’t get the deal them together.

So sometimes you’ll have, you’ll just create a, Cochiti joint venture with two developers that are pretty much playing in the same sandbox. You know, they are you’ll, you’ll definitely get into some gray area and you’ll probably have some egos butting heads at some point. Right. So, you know, that’s another way you could structure it.

That’s awesome. No, that’s, that’s great. We’ll bring us to the, bring us to the next rung.

So the next one would be joint venture equity, which would be a single check equity rider. That’s taking a common equity portion in your deal. But these are institutional groups and they’re, they’re doing it as a joint venture between these, between their group that they’re taking a LP position or a common equity.

But still write a large check. I mean, these are institutional groups where we really rely on at the backbone of our business, where they’re writing checks. That’s at typically 5 million. And they’ll go as large as 30, 40, $50 million for any given deal. So these groups, typical terms are 90 10 or 80 20 joint venture, you know, split off of equity contributed, which means that 90% will be provided by them.

10% must be contributed by the sponsor, which I already alluded to. But then these groups, because they’re large and because they’ll write a large check and get the deal done for you, they’re typically a little bit more expensive. In their term sheets still dictate the fees that you’re allowed to take as a sponsor.

And they come with major, major decision rights. So bill, the typical decision rights that they require that they get to vote on or refinance major cap X expenses and sale, which are the three big ones. So all the big ticket items, they all need to be, you know, they’re the, the, the group that’ll decide, you know, because they’ll have all the voting shares.

So. That’s like a joint venture health equity in terms of what the typical waterfall. They’re typically structuring things with like an eight to 10 preferred return, eight to 10% preferred return, which just means that portion of the waterfall, which is on promoted by the sponsor. And then after that, the waterfalls are pretty standard.

They’ll if it’s a complex waterfall, we’ll have like three tiers, then they’ll go to like, you know, they’ll give you a small portion of what 12 and another portion she left 15. You know, a very generous split thereafter, but it’s all, you know, there’s a market for these things and depending on the quality of the sponsor and quality of the deal in the market that it’s in, you’ll have different waterfalls, but to all look pretty much the same, starting with that eight to 10 preference.

Yeah, no. And, and I think maybe if we have time after this, let’s, let’s dig into, you know, just a typical waterfall structure. okay. Well, that’s, that’s joint venture, anything, any other types of equity, the

equity, which is not structured as a joint. Would be, you know, small check writers, retail investors, like mom and pop 250 grand checks, a hundred grand checks that are, you know, that’s what the syndicators are, are looking for, a real headache to get those things cobbled together.

But if you do the sponsor makes all the decisions. Cause there’s no individual investor, which with enough invested to make any decisions, And that’s where you will see the sponsors making real money on, on feet. I mean, they’re not going to get away with charging a 3% acquisition fee from an institution on a $30 million deal.

But I saw a deal that was $50 million and it was being sent to. So the syndicates, the many check writers that are writing a hundred thousand dollar checks, they may all be in different industries. So they don’t know what the market rate sheet. So the fee that the sponsor started with for acquisition was 5% on $5 million on a million dollar deal.

And it was still all with you as a closing call. So it’d be, you know, it’ll be. As part of this indication. So I’m not complaining. I mean, I mean, I don’t mind money and if they’re delivering, look, I want to have, if they’re delivering the return for their investors, I don’t mind paying fees. You know what I mean?

I’m looking for an 18% IRR or a 9% cash. You’re getting. And you’re good at it, and you’re doing it successfully and you demand a 5% acquisition fee for me to get into your deal. But then if I determine that it’s worth it, I’ll pay it. You know what I mean? I’m not saying that that developer did anything wrong.

I’m just pointing out that back. Those kinds of things. They wouldn’t, they wouldn’t fly with a joint venture partner of an institutional scale. You know, you have more leverage, right? I mean, there’s, you’re, you’re hitting more leverage. There’s more asymmetry of information. There’s more, there’s more wiggle room developer.

The real difficulty comes at the beginning when the raising the money. As they have to answer questions from 40 people that are in this indication or prepare K ones for all those people. But the benefit they get is that these people do make a lot of money on fees. If they’re structuring your deals right.

Or, you know, if they’re taking advantage of it and they make all the decisions, so they choose one to sell and they choose one to refinance and they choose if they want to do a capital call or may make a large CapEx contribution. Yeah, no, that would be, you know, simple LP equity. If you’re trying to learn by what we do, that’s not what we do.

I mean, we do it on a co-GP investment, but we’re going to be the syndicators and not position. Yep. No that’s and then, and then just so everybody can clear the air. I mean, you have this other, this other class called preferred equity. I don’t know how much of it you do or don’t do a lot of portfolio, the preferred equity on Friday.

Walk you through it. Very clear. Yeah. Yeah. Why don’t you walk everyone through that? Cause I’ve seen a lot. I mean, it’s, it’s fairly new to the capital markets. relatively. compared to some of these other, these other, types of equity. And it’s not widely known necessarily by a lot of people because it kind of sits in this weird in between debt equity.

People are looking at it from different perspectives. Go ahead and tell us about preferred a preferred equity preferred equity. First and foremost, clear the air products. Exactly. If you’re trying to do a low-risk deal in which your downside protected preferred equity is not just any equity. So you are not protecting your downside.

If you’re putting preferred equity into your deal. Now I make a lot of money on preferred equity transactions. I mean, those are the easiest ones to get done. It’s like, you know, as a mortgage broker, there are deals where the operator comes to you and just ask for like the easiest mortgage possible. And there was someone they ask for a very difficult transaction where their expectations are high, the deal tar, and the equity world and equity brokers.

The low hanging fruit of the easier executions are those preferred equity transactions. So like it’ll very often happen. I’m not going to lie about this, where somebody comes to us with the joint venture partner and say, look, we’re not going to find the family off this deal or a private equity fund for this deal.

If you’d like us to structure preferred equity investment and show you how it looks, we’re happy to do so. I know it’s not what you asked for, but it’s something we do very often because it’s easier to structure. Am I totally easy to talk for us because it’s not where the equity. And the way it works is let’s say I’m a developer or an owner operator, and I’m buying a multifamily deal and I’m paying $60 million for the deal.

And my senior lender offers me 35 million. Now I have to raise $15 million of capital. If I’m a syndicator, that’s a lot of small checks to collect. So what I may do is I may stick a preferred equity piece into that capital stack. So the senior that would go to let’s say, 75% and then I’ll take a preferred equity investor, no fit behind the scenes.

And it’ll take you from 75 to 85% of the staff. So they’ll cover 10% of the stack. So they’ll write like a $5 million check, we’ll say. So your, your, you know, your entire capital stack that you got the raise for, it just went from 15 to 10 million shouts a lot. On the flip side, what they asked for is a current pay and an all in look back IRR.

So what that means is they’ll say, they’ll tell you look, our money, our preferred equity. We’re going to get paid for. We’re going to get paid before your investors. And when you sell the asset, we’re getting all of our money out. Plus our expected return before any of your investors get their money out.

So that’s where they’re protected. If I preferred equity because they’re preferred in the capital stack and they’re subordinating the common equity behind them. Now what they do in exchange for that asset, they typically charge so always charge a lower IRR. So if the deal is sporting a celebrity 16%.

It traditionally will come in between 12 and 14% all in IRR on the deal is what they’re looking for, that she’s, and the reason they’re settling for that, but they’re lower in the stack. Now, the reason it’s risky is, I mean, it’s risky for your common equity investors, because they’ll typically have an all-in return that they expect, which I said is about 12%, but then they’ll typically ask, they’ll always ask for a portion of it to be paid current, which means we need six to 9% of that 12%.

We need it to be paid out of cashflow. And if you don’t hit those cash flows, we get to sweep your capital. And if even after sweeping all the capital and we’re not hitting our we’ll call it the hard pay rate of let’s say it could be 4%, then you’re technically in default. So then the preferred equity investor will be able to take over the operating agreements and just start operating, operating the property themselves.

Now God forbid that happens, obviously nobody wants that to happen, but that’s the risk you have because you already had that risk with your senior. And then if you insert a preferred equity investor in there, not only do you have to worry about paying your senior lender, you also now have to make sure you’re paying for productivity and both of them come with.

Yep. So, so that’s what preferred equity is. Again, the way it will typically be structured as let’s say a deal right now multi-family deals existing deals, preferred equity costs between 11% and 14% on an IRR basis. And the current pay rates are typically between six and 9% on these deals. So, so you’ll pay them there.

Let’s say 9% current pay. And then when you sell the asset, everybody’s collecting their profits. They’ll get their money out. Then they’ll get their total IRR 13%, which has been at, which had been accruing, you know, all the time. And then once they get paid all of their capital back with their IRR of 13% and they’ve collected their current pay, you know, coupons throughout the existing of the life of a blood vessel, then they’re fun to be out of the deal and your common equity investors could now take their portion.

Now, what typically happens is that, so it’s more risky. it’s beneficial for two reasons. Well, and if it makes the capital raise a lot smaller and two is that it juices returns for the common equity investors. Because if my deal was a 17% IRR for the common equity and I inserted a 12% lookback IRR equity portion at 17%, which was the deal prior now may turn into like a 22% IRR for my investment because other capital in the sec has now become cheaper.

So you’re enhanced or. But, you know, you’re juicing with her. And so it’s, you know, it’s just, it’s up to you to decide if it’s kind of risk, you’re willing to take. Then they’re even all their structures, which we do. So there’s this false prop equity, which comes with none of the risks of going into default throughout the life of the property, but it does come, they still require being paid back on the capital event first.

So come with exit risk, but no, you know, no operating risks or whatever you want to call it. And then you have. Which will sometimes place into deals that are very low level. The perfect notice that scenario would be some guy sitting on a property, 300 units with a 50% leverage on agency that on his property.

And he wants to pull out some equity on his deal because the property values went up like crazy. Originally had an agency that had 75% and now it’s worth 50% of what the property is actually worth. So there are a lot of mez lenders that will take the part of the facts from like 50% like 65 or 70% is a very protective position for them.

But they’ll cost between all of them like eight and 9% and they’ll charge very low current favorites. So that’s another part of the, you know, form of capital, which is also very similar to preferred equity, but we just use it in more, you know, very downside protected.

Yeah, no that’s and that’s, I’ve seen that a lot. I mean, even with the equity and the, and the mez debt, I’ve seen a lot of lenders, a lot of, a lot of groups will play in both of those sandboxes. I mean, I’ve, I’ve had a deal recently, where we wanted preferred equity, but we had tic owner. And for anybody listening, preferred equity and tick owners don’t mesh, right?

It doesn’t work because a lot of financing is very hard with tick owners, to be honest. Yeah. Tick into your deal is like you have to be ready for struggles with the financing. There are a lot of, you know, more finance groups that aren’t for anybody who wondering what a ticket. It’s one of our big group of investors.

They all own direct. You know, they all have direct ownership to the property instead of investing into an entity, which is owning the. At 10 31 benefits so that each individual investor has the ability to 10 31 out of the property and their own, you know, with their own entity. That’s why a lot of people do it.

A lot of bigger investors that are writing large checks will demand that they come in as a tech tip instead of the onset of a traditional, you know, buying into that entity.

Exactly. And, and, and so w you know, we do that, we do that, and facilitate our investors in that a decent amount of the time. But yeah, I had, I had one lender that we wanted the preferred equity, but obviously they don’t mix because the preferred equity wants to take that, priority position to a, to a tic owner.

And you can’t do that. If they came from a 1031 exchange, Into the tick. The problem is, is that relationship then ruins their 1031 exchange status. And so you can’t do the preferred equity with the tick. So we basically had a preferred equity lender that says, okay, here’s what we’ll do. I’m going to bring in preferred, I’m going to bring in preferred equity.

It’s going to look like preferred equity. It’s going to smell like preferred equity. It’s going to act like preferred equity, but we’re going to call it mez debt. And. You know, and so there’s a lot of creativity, that can happen, especially in these, in these equity transactions. Jonathan, one thing I want to get to, cause I know a lot of our listeners have often asked this question.

The waterfalls. I mean, the second you started talking about waterfalls to anybody who’s not in finance, it’s like the eyes just start glazing over. And they’re like, I have no idea what, what you’re even talking about. Like, I just want my, so how much money am I getting? You know, kind of question. Can you break down just what a waterfall is?

And then maybe what a typical waterfall would look like?

Sure. So on the topic of how to understand a waterfall, I’m not going to go on and say, From day one to year five, how it all breaks down, because I’ll tell you how I learned, how I understood it is. I actually took a course from Justin kibble and you to me, just to see, I didn’t need to learn how to model it because it’s not really what I do all day.

I just wanted to see from like the, in Excel, where all the money is going in the waterfall. So if you really want to understand how the money is distributed in a waterfall, I would recommend. Learning how to model it, because it’s the only way it will see where every dollar is going. I could tell it to you, you know, more broadly, you’re not going to get a real nuanced understanding of it, but more broadly, the waterfall is just an agreement between the two partners in the deal with the common equity partner and the operator who’s called the sponsor on how they’re going to distribute cash flows.

So the sponsor will typically come with, you know, an acquisition. Maybe an asset management fee all as a matter of contention, if it’s, if it’s relevant, you we’ll come, we’ll come with a construction management fee. But then the bulk of the money that the sponsor is making is that they’re going to get an outside portion of cash flows from the deal due to their performance or based on their performance.

So what a waterfall does is that just creates a situation or create a scenario for the sponsor and. It’s not that hard to give me the common equity investor, an 8% return. So you’re not going to get any fees or any promoted interest. We’ll call it until I hit my 8% return. You know, if I need to get my capital back and I need to get 8% on my, on my month after that, we can start to discuss what your fees are, what your promote is going to be like, or your promoted interests, your extra, you know, the extra money that you’re taking to cash.

And. You know, up until that 8% preferred return that I’m getting, I contributed 90% of the money and you contribute 10%. We’re just going to flip it 90 10, because I’m not letting you keep any, but if you Mr. Response, or get past that 8% preferred return and show me a 12% IRR and any of the money that got me from my eight to my.

Instead of letting you only keep 10% of the cash flow, I’m going to let you keep 20% of the cash. So even though the sponsor only contributed 10% of the money, there is all upon exiting the property. There is a portion of the cash flows, which are going to split on evenly where the sponsor will be taking 20% instead of the 10% that’s his prorate share.

So that’s, I simply, as I can, if I can explain what a waterfall is and you can imagine it just goes the further up the IRR scale. The more, the sponsor is going to collect out of, out of, you know, out of the waterfall. So there are groups that they’re only really looking to hit a 15% IRR. I don’t want to help the equity group that we focused on hitting their 15%.

So once they get the 15% that will allow the sponsor to take 50% of cash, but we can only keep 50% for themselves, you know? And then you will see deals, which are like, I’ll say the build to suit retail market is very, very, very commoditized. Equity market equity splits are completely different. And in those markets that you’ll see equity splits as aggressive as the sponsor collect 70.

After hitting an 8% preferred return. And the investor only gets 30%, even though they contributed 90% of equity. So depending on the asset class that you’re in or the structure of the development or the strength of the operator or the quality of the deal. You will distribute the cashflows from the waterfall differently.

But the basic principle is that it’s just an agreement on how to pay the sponsor more for achieving certain results in IRR terms. How do I, the, the common equity wants to pay it is because you always want the motivated sponsor. If the sponsor is going to make the same amount, whether they hit a 15% IRR or 22%.

Then there, they may, you know, they may have other deals to work on, so they’ll just go and focus on other deals. But if they know that they’re going to really have a huge windfall, if they break that 20% IRR threshold, then they’re going to work their butt off until we get there. So, so you incentivize the sponsors per Dina.

Again, the typical waterfalls, I’m not going to explain what this all means, but it’s typically starting at an eight dependent. Due to the common equity investor and then the waterfall, if it’s a 90, 10 split will typically become like an 80 20 after that until the 15 and then a contemporary like a 70, 30, or, you know, it could be any, you know, at that point, it’s just a negotiation on how you wire waterfall, that would be like,

That was, that was a great explanation. Thank you for doing that, Jonathan. And one of the things to kind of take away, right? As, as we’re talking about all of this for, for everybody who’s listening, the reason this can be somewhat confusing is because there is like an infinite number. Of options to put this all together. I mean, you can get as creative or as not creative as you want.

I mean, it can be as simple as like, Hey, it’s just like a down payment on a house. One group brings in equity, capital, one group brings in debt and we do the, that, and that’s it. And we’re done and we move on. Yeah. But you can get, you can get multiple layers, multiple levels, you can combine different things.

And so there is a lot of creativity. They can go into this all based on, Hey, what’s the Mo what’s the optimal structure, right? What at the end of the day is going to make everybody the most money. You can bring in all sorts of different pieces in order, in order to do that. And so Jonathan’s just really touched the surface.

On a, on a broad spectrum. But you could dig in and you could find, you know, different subsets and all of the things that he’s talking about, where people do a little bit different, activities, right? I mean, in the JV that’s it could be a little bit different in the LP equity. Things can look a little bit different.

It’s not all set and structured. Like you might see in a lot of, it’s definitely not, not very commodified that all in the equity market, everything is different. And, you know, as an equity broker, you’re constantly looking for new, new groups that are interested in deploying capital. And if you find a group that has cheaper capital than your competitor, you know, that competitor may be doing 10 times more volume.

You have an edge because you found it was not a commoditized business and you, you, you know, if your capital is cheaper than the next guy, or if you have a group that’s willing to deploy capital more relative, readily than the next guy, and you’re always having an edge. One of my favorite things about the business is that there are so much, there is so much restructuring involved.

The broker can pump very, very useful. I mean like a lot of times sponsors don’t even know how to negotiate these things cause they don’t even have a real intuitive understanding of it. So you can provide a lot of value with your sponsor if you’re going to what you’re doing. That’s awesome. Well, Jonathan, we’re going to wrap up here a little bit.

I’m going to ask you just a couple of questions that I ask all my guests. Number one, what is the best business advice you were ever given?

Appreciate a lot, just live in the failure. Just, know, let it, let it wash over you and just feel it helping you grow. I think learning to live with failure, I learning to have that growth mindset from failure, I think is the, is the greatest thing you’re going to do for yourself?

Cause there’s something I have on my wall. It says when nothing seems to help, I go and I look at, at, I stonecutter hammering away at his. Perhaps a hundred times, without as much as a crack showing in it, it has a hundred and first blow at the a hundred and first blow it’ll split into. And I know it was not that last blow that did it, but all that had gone before, you know, it’s all the failures before helping you like a certain level of success.

And one of the success comes will come. But if you have, if you don’t have the ability to, you know, the thick skin to withstand a certain amount of failure before you got there, it’s not going to come together. No,

I completely agree. I mean, I think that’s, honestly, if you are, you know, a business executive, a business owner, a real estate investor, whatever you are.

I think learning to, to not only just make it through those failures, but thrive. Off of a failure is what separates people from being okay and being great. You know, I honestly, I’ve often been told in my own circumstance, I’ve often been told as a real estate developer, I’m really risky. And it’s like, all these things.

It’s like, you know, I just, I, I feel like I’ve, I’m learning, I’m constantly learning to just. To thrive off of failure. Right. I learn more. I grow more I from the failures than I do from successes, you know, and I want those successes. I need those successes, but the failures are really where I go from here to here in my growth. Successes. Everybody gets to do a high five and celebrate, but I don’t necessarily grow nearly as much as I do from learning off of a failure. Yeah, exactly. Awesome. Great, great advice on if everyone should just go back and listen to that again, that like last two minutes segment, because if you got nothing else from this podcast, from this episode than that, you would be infinitely better off than you are right now.

The next question, Jonathan, what real estate investing advice would you give other business owners or business executives?

I’m scared to say this because, I make money off people levering up their deals, but especially where we are on the cycles. It’s, don’t over lever. There’s a big temptation right now.

I don’t know. You ask more broadly in business, but I’m stuck in the real estate world. So, but don’t over lever because right now yields are so low that there’s going to be a temptation to use more leverage, to hit the yields. You were getting five years. And it’s a never ending cycle. You may end up shooting yourself in the foot and losing it all.

So not using too much leverage staying with non-report debt and not using too much leverage, I think is very, very, very key. Especially for where we are on this cycle. Now, if we’re at the bottom of a cycle and things are dirt cheap and you know, and you’re pretty confident you’re at the bottom and use all the leverage you want.

If you can find people willing to lend it to you. But right now, when everybody’s flush with capital and prices are extremely high, be okay. Making less, you know, you don’t need to make 40% IRR on every deal because the fraud issue for that, you’re probably doing it with the financial. And not do the real fundamental.

I love it. Well, Jonathan, I got a follow up question for you then on that one, what do you feel right now? Where do you feel like that leverage should lie in general? Obviously it’s going to be different for different asset classes, but if you were to just, yeah. Pick a number out of an error and say, generally, this is what I would say.

What’s that number for you? Long term fixed rate debt at 70%, if you’re talking multi-family acquisition 70, 70, none of your deals are going to work. You won’t be able to underwrite anything. So maybe you’ll just be on the sidelines or maybe you should find another asset class, but let’s say you’re talking multi-family acquisition now.

I’m nobody to speak. Like I sound like I’m operating 4,000 units. Other guys that’s when I’m more stressed than I am. I’ve I invested in M and a couple of deals in, in New York. And I saw, especially when the markets started getting more over-regulated and the values underlying value of our properties went down overnight, some regulation, which was outside of our, you know, what we ever imagined would happen.

So, you know, what’s, what’s becoming the biggest problem on those deals with the debt maturities coming up, kind of like you can’t get out of those debt maturities you’re on a. Yeah. Yep. Yeah. That would be well, love it. I think that’s great advice. I mean, all the time, you know, in the development world, you see, you see new developers, who struggled to get capital.

And so they try and counteract that by going, I mean, I’ve seen 90, a hundred percent leverage, like, you know, when I’m traveling, I’m in Brooklyn. And I know I can get a deal Donald, if the sponsor’s willing to take the high leverage, I, I, you know, I’m not rich enough to just tell him like, no, I’m sorry. Like I, I’m not going to do this deal with you.

I’m not going to introduce you to that high leverage group. That’s going be your tomorrow. I’ll make that introduction. But if, but that’s the guy’s own decision, like, you know, I don’t know, to what extent as a broker, I need to save people from the. No, I don’t a lot of times, you know, if you’re doing this thing multifamily and like, so I think it’s a preferred equity.

Investment’s going to definitely kill you. No, of course not like you don’t want the family a pretty stable asset class overall, but I’m just, you know, but, but for my personal money that, you know, the commissions that I make and where I invest that I only invest in very low level.

Well, Hey, I appreciate it Jonathan. How can people get in touch with you? Email is Easiest way to reach me. You go send me a DM on LinkedIn. I’m not a big fan of people calling me out of the blue and then leaving a voicemail cause I tend to miss voicemail, but if somebody wants to call me and then email me.

So that I could just quickly see what the call is going to be about and get back. It would be pretty much the easiest way. I like to have everything in writing from memory on if somebody just calls me and accepts me to remember that I called them. It’s much easier for me to remember if I have their emails sitting in my inbox.

So I’d probably be the best way

Well, we’ll go ahead. We’ll make sure that his email and his LinkedIn. Contact is in the show notes so everyone can see that there. Jonathan, thank you for your time today.

Thank you so much, Michael.

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